Under investor pressure, Danone eyes more profit growth in 2018

PARIS (Reuters) - Food group Danone said on Friday it would accelerate sales growth this year and deliver a further rise in profits as it seeks to respond to pressure from investors.

Emmanuel Faber, Chief Executive Officer of French food group Danone, poses before a news conference to present the company's 2017 annual results in Paris, France, February 16, 2018. REUTERS/Pascal Rossignol

Danone, the world’s largest yoghurt maker, reported overall 2017 earnings that slightly beat expectations, with solid demand for baby food and waters in China more than offsetting weak dairy sales.

Shares in the company rose around 1 percent, outperforming France’s main share index. The stock is down 7 percent so far this year, erasing almost half of last year’s gains.

Danone, whose brands include Evian Water, Activia yoghurt and Bledina baby food, said it was targeting a double-digit rise in 2018 underlying earnings per share (EPS), excluding the impact of the sale of a $1.9 billion (£1.3 billion) stake in Japan’s Yakult announced this week.

The company, alongside consumer goods peers such as Nestle and Unilever, is under investor pressure to improve results and it needs to deliver on 2020 profit margin and sales growth targets it set last year.

In August 2017, hedge fund and activist investor Corvex Management bought a 0.8 percent stake in Danone, following similar steps at Nestle and Procter & Gamble.

Danone has been touted as a potential target for suitors or shareholders seeking better returns, given that profits and sales have disappointed some investors in recent years.

The company trades at 17.1 times estimated 12-month forward earnings against 20.1 times for Nestle and 18.3 times for Unilever.

The purchase last year of U.S. group WhiteWave, which makes almond milk and organic products, is intended to boost Danone’s profit margins, given WhiteWave’s generally affluent clientele, while Danone has also been cutting costs.

Emmanuel Faber, Chief Executive Officer of French food group Danone, poses before a news conference to present the company's 2017 annual results in Paris, France, February 16, 2018. REUTERS/Pascal Rossignol

Danone said on Friday that the integration of WhiteWave was progressing well with more than $50 million of synergies delivered in 2017, ahead of target.

“We are starting 2018 with stronger foundations and I am confident that we are on track to accelerate towards our 2020 ambition,” Chairman and CEO Emmanuel Faber said in a statement.

FILE PHOTO: The logo of French food group Danone is seen at the company's headquarters in Paris, France, December 20, 2017. REUTERS/Charles Platiau/File Photo

ISSUES AT DAIRY BUSINESS

Danone is targeting an operating margin above 16 percent of its sales and like-for-like sales growth of 4-5 percent by 2020.

Danone has suffered slower growth overall than its rivals, largely due to weakness in its dairy business in Europe, which has had to contend with sluggish demand and the relatively unsuccessful Activia re-launch, while in China its baby food and waters businesses have had regulatory issues.

There were signs of an improvement, with Danone noting stronger demand for baby milk formula in China, but the dairy business remained under pressure in general.

“We see good progress being made here, but ongoing negative momentum in fresh dairy testifies to continuing challenges ahead,” wrote analysts at brokerage Jefferies, which kept a “hold” rating on Danone shares.